Some Investors May Be Worried About Metso Outotec Oyj's (HEL:MOCORP) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Metso Outotec Oyj (HEL:MOCORP), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Metso Outotec Oyj is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = €505m ÷ (€6.8b - €2.9b) (Based on the trailing twelve months to December 2022).

So, Metso Outotec Oyj has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.1% it's much better.

Check out our latest analysis for Metso Outotec Oyj

Above you can see how the current ROCE for Metso Outotec Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Metso Outotec Oyj here for free.

How Are Returns Trending?

In terms of Metso Outotec Oyj's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 13% from 17% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Metso Outotec Oyj has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Metso Outotec Oyj's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Metso Outotec Oyj is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 59% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with Metso Outotec Oyj and understanding this should be part of your investment process.

While Metso Outotec Oyj isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.